Interaction of Individuals, Firms, and Societies

Firms allow an economy to operate more efficiently and reduce the transaction costs of coordinating production.

Producers and consumers trade because the exchange makes both parties better off.

An efficient market maximizes total consumer and producer surplus.

In a free market, the price and quantity of an item are determined by the supply and demand for that item.

A perfectly competitive market with full property rights is typically efficient.

Governments can intervene to make a market more efficient when a market failure, such as externalities or asymmetric information, exists.

Variables that describe the full economy, such as GDP and unemployment, are determined by the decisions of individual economic actors.